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Cara's ready for U.S. and Canadian expansion after the Keg's purchase

TORONTO — Cara Operations Ltd. is beefing up its already large presence in the Canadian restaurant business with a $200-million acquisition of Keg Restaurants Ltd., a move that could help take a bigger bite out of the U.S market.

The acquisition announced Tuesday adds 106 steakhouses to the Vaughan, Ont. company's empire of 1,259 restaurants, which are mostly in Canada.

Cara's brands include Swiss Chalet and St-Hubert chicken restaurants, the Harvey's, Burger's Priest and New York Fries quick service chains, Milestones, Montana's, Kelsey's, and East Side Mario's casual dining restaurants, as well as Prime Pubs, Elephant & Castle and Bier Markt.

Only a small fraction of those restaurants have seeped across the border to the U.S. and other countries, but Cara and KRL's CEOs said at a press conference Tuesday that they see potential for international growth.

"At some point, we will run out of room in Canada and The Keg already has a foothold in the U.S.," Cara CEO Bill Gregson said.

He thinks more of Cara's brands will cross the border and the 10 American Keg steakhouse and handful of U.S. Elephant and Castle pubs will act as "a beachhead for expansion" without "risking the farm" as it grows.

"We will figure out what the pace will be over time (but) there is still opportunity in mid-size markets in Canada," Gregson said.

KRL's CEO David Aisenstat will remain in charge of the Keg operations and assume oversight of Cara's higher-end casual brands Bier Markt, the Landing Group and Milestones restaurants. He said KRL is already bigger than American steakhouse competitors Flemings and Del Frisco's.

"The potential for us to make a dent there and really grow our brand there is pretty severe," he said. "We have a lot of room in Quebec and three (Kegs) slotted for Alberta for a couple of years, so we have some growth here."

However, Aisenstat admitted he could see The Keg growing to 120 restaurants in Canada, but probably not 150.

In recent years, Canada's restaurant industry has rapidly expanded and become increasingly consolidated.

In December, MTY Food Group added Baton Rouge-owner Imvescor to its roster of dozens of quick-serve food chains, including Country Style, Mr. Sub, ManchuWOK, Extreme Pita, Pinkberry and Villa Madina.

At the start of 2017, Restaurant Brands International, which owns Tim Hortons and Burger King, nabbed Popeyes Louisiana Kitchen for US $1.8 billion.

Cara's latest buy was the Toronto-based Pickle Barrel chain in September 2017.

"We have always been opportunistic," said Gregson, adding most of Cara's acquisition targets have approached the company rather than it pursuing them.

However, the KRL and Cara deal stemmed from an ongoing relationship of their CEOs, which Gregson said often involves "the odd round of golf" and "a basketball game here and there." Gregson has also sat on KRL's board for the past four years.

They started mulling over a partnership shortly after Cara launched its Kellys Landing restaurant in Toronto last fall and Gregson invited Aisenstat for a meal there to grab some advice on the spot from his pal.

Aisenstat, who rose through the ranks at his father's Hy's Steakhouse chain in Toronto, said the deal was particularly exciting because Cara has expanded so much in the last four years and he admitted he probably eats at Cara's Swiss Chalet restaurants just as much as he dines at The Keg.

The Competition Bureau said Tuesday the Cara-Keg deal will be subject to its review, but wouldn't comment further.

Under terms of the deal, Cara has agreed to pay KRL's shareholders — Fairfax Financial Holdings Ltd. and Aisenstat — $105 million in cash and 3.8 million Cara subordinate voting shares.

In addition, Cara may have to fork over another $30 million in cash if certain financial milestones are attained within the first three fiscal years after the deal closes.

Cara will change its corporate name "to reflect the new business composition" once the deal closes. Gregson and Aisenstat joked that they were floating "Bill and David's Bar and Grill" as a possibility, but aren't sure it will make the cut.

But they were sure that Cara brands won't start selling Keg menu items and the Keg's relationship with the Keg Royalties Income Fund, a publicly traded entity that receives royalties from Keg restaurants operated by KRL, won't change.

Gregson said, "We had no conversations with the fund about buying the fund portion" and "it is not on the radar" in part because the yield of the fund means Cara would need "a huge multiple" to buy out the fund.

KRL was founded as the Keg and Cleaver in 1971 by British Columbian entrepreneur George Tidball, who was also involved with the Spaghetti Factory, A&W, and Apex ski resort.

Meanwhile, Cara was founded in 1883 as the Canada Railway News Company, specializing in the sale of newspapers, magazines and sweet treats at rail hubs. It later transitioned towards catering and eventually, turned its attention to restaurants.

Companies in this story: (TSX:CARA, TSX:KEG.UN, TSX:FFH)

Tara Deschamps, The Canadian Press

Note to readers: This is a corrected story. A previous version said the number of Keg locations in Canada was 160.